Designing Network Codes

Copyright © Baringa Partners LLP 2016. All rights reserved. This document is subject to contract and contains confidential and proprietary information.

Designing Network CodesPresentation to the Vienna Forum on European Energy Law

Adrian Palmer

14 April 2016

2Copyright © Baringa Partners LLP 2016. All rights reserved. This document is subject to contract and contains confidential and proprietary information.

Introduction to Baringa

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Founded in the UK in 2000 – Baringa Partners has a market turnover ofapproximately £80m, with more than 400 professionals. Our Germanbranch office opened in 2011 to increase support of our clients incentral and eastern Europe

Our expertise covers the entire gas and power value chain, upstream,generation, networks and retail. We are proud to be trusted advisors tonetwork operators, utilities, developers, investors, lenders andgovernment bodies, and with the results we have delivered for theseclients.

Our multi-disciplinary team consists of specialists with backgrounds inconsultancy, finance, private equity, law, regulation and utilities. Ourwork is informed by knowledge of markets, regulation, assets,operations and capital, and in-depth insight into theirinterdependencies.


Network Code development

Current status

Design principles

Outstanding design issues and the Energy Union

Concluding observations

Agenda


The Network Codes are a series of common rules that govern access to, the use of, and operation of the electricity and gas markets across Europe

Aim to promote cross-border trade and create a level playing field to facilitate competition

Network Codes are a key component of the Third Energy Package, underpinning the development of the Internal Energy Market for gas and electricity

Introduction

Third Energy Package

Infrastructure

PCIs

Unbundling

TYNDP

Internal Energy Market

Target model

Network Codes

Transparency

Institutions

ACER

NRAs

ENTSOs

NEMOs


New institutions created by the Third Package (ACER, ENTSOs) are central to code development

Code Development Process

EU Commission

ACER

Agency for the Cooperation of

Energy Regulators

ENTSO-E/G

European Network of Transmission

System Operators

2009

Publishes Third

Energy Package

Invites ACER to develop Framework

Guidelines

ACER drafts and consults on the Framework Guidelines

ENTSO-E/G drafts Network Codes

2016

Comitology(European Council)

High level requirements

Principles of (market) operation

EU-wide details of market operation

Invites ENTSO-E/G to develop the Network Codes

ACER opinion

CION opinion


Only one electricity code (CACM) adopted to date, seven others under development

Three families of common market rules for electricity

‒ Market rules for trading in defined timeframes (blue)

‒ Standards for connecting different types of assets to the market (red)

‒ Operating the transmission network in a consistent way across Member States (purple)

Additional codes to be developed include harmonised transmission tariffs

Network Code Status – Electricity

Source: National Grid


Gas Network Codes now largely in place, tariffs and incremental capacity in progress

Network Code Status – Gas

Source: E-CONTROL

Network Code Adopted?

Capacity Allocation Management

Congestion Management Procedures

Gas balancing

Interoperability and data exchange

Harmonised Transmission Tariff Structures

Pending

Incremental capacity Pending


Primary objectives:

1. To ensure optimal use of transmission network capacity in a coordinated way

2. To achieve reliable prices and liquidity in day-ahead capacity allocation (via market coupling)

3. To design and facilitate efficient markets across all timeframes – forward markets, day-ahead and intraday

4. To harmonise EU-wide balancing arrangements to enable sharing of resources close to real-time

An integrated trading framework over all market timescales with harmonised rules

Design principles and objectives


Implicit allocation of interconnection capacity via market coupling improves the efficiency of cross-border day-ahead trading, with potential benefits estimated at over €1bn p.a. across EU28

Netherlands France Ireland Great Britain

NL-FR price differences and flows pre-market coupling SEM-GB price differences and Moyle interconnector flows, 2013

Market coupling

Source: SEM Committee (2015)

Flow in wrong direction

Flow in wrong direction

Source: Moss (2009)


Day-ahead market coupling operational, intra-day and balancing to follow in 2-6 years

Day-ahead Market Intra-day / Balancing

Roll-out of day-ahead coupling largely completed via ‘Regional Initiatives’ before formal adoption of CACM Network Code

Intra-day implementation delayed, extended timeline envisaged for harmonising balancing arrangements and facilitating cross-border exchange of balancing services

Successful roll-out of day-ahead coupling built upon established and proven practices in Nordic and North West European markets, but fewer precedents for the intra-day and balancing markets

Greater technical challenges associated with real-time co-ordination and prevalence of system operational constraints

But material benefits from harmonised balancing arrangements due to increasing deployment of intermittent renewable resources

Progress to date


Potential areas for consideration include energy security interventions, renewables integration, forward trading, decentralised resources and demand-side response

Launch of the European Energy Union in 2015 represents the latest in a series of EU wide projects to coordinate the transformation of European energy sector

The project is based around five pillars:

1. Energy security, solidarity and trust

2. Internal market, interconnections and renewables integration

3. Demand moderation, energy efficiency

4. Decarbonising the economy

5. Research and development

Increasing recognition that further evolution of the Target Model and Network Codes is likely, given some key market design components were out of scope for initial phase of harmonisation

Extending the Target Model

Renewables support and integration

Governanceand market

scrutiny

Forward trading and

liquidity

Infrastructure roll-out

Energy security and

capacity mechanisms

DSR / DSOs & smart grids

Network Codes


Differences in renewable support schemes can distort investment decisions between regions, as well as distorting short-term operational decisions, interconnector flows and balancing costs

Deploying renewables at lower cost to European consumers will likely require greater harmonisation and cross-border co-operation

EU Member States Europe have deployed a variety of subsidy mechanisms to support the drive towards renewable targets, but at risk of distorting the internal market

Further considerations: RES-E support

Feed-in tariff (FiT)

Quota obligation system

Feed in premium(Bonus system)

Source: Rehva, Reegle

Similar considerations apply to security interventions such

as capacity mechanisms


CACM Network Code sets out principles for defining market zones for congestion management and spot pricing, but the Target Model does not set out a clear vision for forward trading hubs

The zones defined for day-head trading have the potential to create or dilute local hubs of liquidity

ACER’s 2014 report on bidding zones recognises that forward liquidity is limited in smaller markets and suggests that alternative cross-border products may be required to create a level playing field

What will the EU Target Model mean for forward trading?

Further considerations: forward trading

Smaller zones Larger zones

How many liquid trading hubs are envisaged for

European gas and power?


Concluding observations

Significant effort and resources have been devoted to developing and implementing network codes

Tangible benefits already realised, examples are:

‒ Day-ahead market coupling in electricity

‒ Roll-out of booking platforms in gas

Anticipate increasing focus on the network code amendment process as the vehicle for accommodating emerging design features and regional priorities

Stakeholders with extended implementation timelines (e.g. Energy Community, Ireland) have the advantage of building on proven methodologies, systems and arrangements…

But may still need to hit a moving target (e.g. electricity intra-day trading and balancing)

And designs based on common practice in continental / North West Europe may not always be the most appropriate (e.g. HVDC interconnectors, centralised dispatch, island systems)

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Adrian PalmerDirector

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